THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY'S
UNAUDITED FINANCIAL STATEMENTS, THE NOTES THERETO AND THE OTHER FINANCIAL
INFORMATION APPEARING IN THIS REPORT.
Introduction
The financial data discussed below are derived from the unaudited consolidated
financial statements of the Company as of June 30, 2021, which were prepared and
presented in accordance with United States generally accepted accounting
principles for interim financial statements. These financial data are only a
summary and should be read in conjunction with the unaudited financial
statements and related notes contained herein, which more fully present the
Company's financial condition and operations as at that date, and with its
audited financial statements and notes thereto contained in its Annual Report on
Form 10-K for the year ended December 31, 2020, filed with the SEC on April 16,
2021. Further, the Company urges caution regarding the forward-looking
statements which are contained in this report because they involve risks,
uncertainties and other factors affecting its operations, market growth,
service, products and licenses that may cause the Company's actual results and
achievements, whether expressed or implied, to differ materially from the
expectations the Company describes in its forward-looking statements. The
occurrence of any of the events described in Part II, Item 1A - Risk Factors, or
other events, could have a material adverse effect on the Company's business,
results of operations and financial position.
General Statement of Business
The Company was incorporated under the laws of the state of Florida on September
5, 1997 under the corporate name Synthetic Flowers of America, Inc. It changed
its corporate name to Acology, Inc. on January 9, 2014; on August 28, 2018, to
Medtainer, Inc.; and on October 3, 2020, to its present name.
The Company is in the businesses of (i) selling and distributing hydroponic
containers called "GrowPods" and related products and (ii) designing, branding
and selling proprietary plastic medical-grade containers that can store
pharmaceuticals, herbs, teas and other solids or liquids and can grind solids
and shred herbs, as well as selling other products such as humidity control
inserts, smell-proof bags, lighters, and plastic lighter holders, and providing
private labeling and branding for purchasers of the Company's containers and the
other products.
The Company markets its products directly to businesses through its phone room
and to the retail public through internet sales. The Company also markets
directly to wholesalers and other businesses that resell them to other
businesses and end users.
On October 9, 2020, the Company acquired all of the outstanding shares of
Advanced Container Technologies, Inc., a California corporation ("Advanced"),
from its shareholders pursuant to an Exchange Agreement, dated August 14, 2020,
which was amended on September 9, 2020 (as so amended, the "Exchange Agreement",
in exchange for 50,000,000 shares of the Company's Common Stock. This exchange
resulted in Advanced's becoming a wholly owned subsidiary of the Company.
The acquisition of Advanced represents a material change in the business
strategy of the Company and an expansion of its product base. Since the
inception of the Company in 2014, its intended growth strategy was to
concentrate on increasing sales of Medtainers®, while introducing related
products and services, such as humidity control inserts and printing. This
approach resulted in relatively flat revenues, increasing expenses and a history
of losses. Management believes that this acquisition offers the prospect of
substantially increased revenues, without a comparable increase in expenses, and
offers the Company an opportunity to attain significant profits.
The Company has authorized capital of 100,000,000 shares of common stock, par
value $0.00001 per share ("Common Stock"), and 10,000,000 shares of preferred
stock, without par value. On March 22, 2019, the Company combined the
outstanding shares of its Common Stock on the basis of one share for each 100
shares then outstanding and on that date, reduced the number of authorized
shares of Common Stock from 6,000,000,000 to 100,000,000, while the number of
authorized shares of preferred stock remained 10,000,000. On October 3, 2020,
the Company combined the outstanding shares of its Common Stock on the basis of
one share for each 59 shares then outstanding; the number of authorized shares
of Common Stock and preferred stock was unaffected. The effects of these
combinations have been retroactively applied to all periods covered by this
report. The Company has also designated 1,000,000 shares of its preferred stock
as Series A Convertible Preferred Stock ("Series A Preferred" and, on July 31,
2020, issued them to its chief executive officer in exchange for 305,085 shares
of his Common Stock; these shares, together with the shares of Common Stock
owned by him, confer voting control of the Company on him.
The Company's principal place of business is located at 1620 Commerce St.,
Corona, CA 92880. The Company's telephone number is (951) 381-2555. The Company
has two corporate websites: www.advancedcontainertechnologies.com for GrowPods
and related items and www.medtainer.com for Medtainers® and related products and
services. Common Stock is quoted on the OTC Pink tier of OTC Link, a quotation
system operated by OTC Markets Group Inc., under the trading symbol ACTX.
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Going Concern
As indicated in Note 3 of the Notes to Consolidated Financial Statements, there
is substantial doubt as to the ability of the Company to continue as a going
concern. The Company has generated material operating losses since inception and
its ability to continue as a going concern is dependent on the successful
execution of its operating plan, which includes increasing sales of existing
products - and in particular GrowPods and related products - while introducing
additional products and services, controlling cost of goods sold and operation
expenses, negotiating extensions of existing loans and raising debt or equity
financing. No assurance can be given that the Company will be able to do so.
Need for Capital
The Company needs a substantial amount of additional capital to fund its
business, including expansion of its operations, and for repayment of its debts.
See "Liquidity and Capital Resources." No assurance can be given that any
additional capital can be obtained or, if obtained, will be adequate to meet its
needs. If adequate capital cannot be obtained on a timely basis and on
satisfactory terms, the Company's operations could be materially negatively
impacted it may need to take certain measures to remain a going concern, or it
could be forced to terminate operating.
Impact of the Covid-19 Pandemic
To mitigate losses during the Covid-19 pandemic and the ensuing recovery period,
the Company terminated serveral of the 18 employees that it had in early 2020,
such that it now has 8 employees, including officers, which it believes is the
minimum necessary to maintain its operations. The Company's chief executive
officer has waived current payment of his salary since June 1, 2020; however,
the Company is accruing it and is obligated to pay the deferred amount, which
was $178,750 as of June 30, 2021, at some future time. In addition, the Company
is deferring employer payroll taxes, as permitted by the Coronavirus Aid,
Relief, and Economic Security Act (the "CARES Act"). The Company does not intend
to restore its staffing to pre-pandemic levels, although it may add personnel
depending on demand for GrowPods and related products. The Company is also
purchasing fewer Medtainers® than required under the production contract with
their manufacturer; while doing so has enabled the Company to preserve cash by
reducing expenses, it also has subjected it to claims for breach of that
agreement. For additional information regarding the impact of Covid-19 pandemic
on the Company, see "Impact of the Covid-19 Pandemic," in Part II, Item 1A -
Risk Factors.
Results of Operations
Comparison of the Three Months Ended June 30, 2021, and June 30, 2020
The following table sets forth information from the statements of operations for
the three months ended June 30, 2021, and June 30, 2020.
Three Months Ended
June 30, 2021 June 30, 2020
Revenues $ 758,572 $ 293,040
Cost of goods sold (491,828 ) (142,057 )
Gross profit 266,744 150,983
Operating expenses 556,370 408,659
Loss from operations (289,626 ) (257,676 )
Non-operating income (expense):
Economic Injury Disaster Loan grant - 10,000
Interest expense (7,786 ) (9,254 )
Net loss $ (297,412 ) $ (256,930 )
Revenues
Revenues were $758,572 and $293,040 for the three months ended June 30, 2021,
and June 30, 2020, respectively. The increase was primarily due to a $145,000
increase in revenues from sales of GrowPods (which the Company did not sell
prior to January 1, 2021), a $117,382 increase in revenues from sales of
lighters, a $42,260 increase in revenues from sales of other products, a $26,687
increase in revenues from sales of plastic lighter holders, and a $19,448
increase from sales of humidity pack inserts.
15
Cost of Goods Sold
Cost of goods sold for the three months ended June 30, 2021, and June 30, 2020,
were $491,828 and $142,057, respectively. This increase was primarily due to a
$135,000 increase in the cost of GrowPods (which the Company did not purchase
prior to January 1, 2021), a $78,819 increase in the cost of lighters, an
increase of $29,686 in the cost of other products, a $18,287 increase in the
cost of Medtainers, a $15,915 increase in the cost of packaging supplies and a
$15,375 increase in the cost of humidity packs.
Operating Expenses
Operating expenses for the three months ended June 30, 2021, and June 30, 2020,
consisted of the following:
Three Months Ended
June 30, 2021 June 30, 2020
Advertising and marketing $ 17,604 $ (2,022 )
Bad debt - 32,470
Depreciation and amortization 69,384 23,847
Professional fees 51,048 30,520
Share-based compensation - 149,039
Payroll 349,244 123,748
General and administrative 69,060 51,057
Total operating expenses $ 556,370 $ 408,659
Operating expenses were $556,370 and $408,659 for the three months ended June
30, 2021, and June 30, 2020, respectively. The increase in operating expense was
attributed to a $225,496 increase in payroll expense, a $45,537 increase in
depreciation and amortization expense and a $20,528 increase in professional
fees. This increase was partially offset by a $149,039 decrease in share-based
compensation and a $32,470 decrease in bad debt expense.
Loss from Operations
Loss from operations increased from a loss of $257,676 for the three months
ended June 30, 2020, to a loss of $289,626 for the three months ended June 30,
2021. The increase in loss from operations was primarily due to a $225,496
increase in payroll expenses.
Other Income (Expense)
During the three months ended June 30, 2020, the Company received an Economic
Disaster Injury Loan grant of $10,000. For the three months ended June 30, 2021,
and June 30, 2020, interest expense was $7,786 and $9,254, respectively.
Net Loss
The net loss for the three months ended June 30, 2021, was $297,412 ($69,384 of
which was non-cash expense for depreciation and amortization), versus a net loss
of $256,930 ($149,039 of which was non-cash for share-based compensation and
$23,847 of which was non-cash expense for depreciation and amortization) for the
three months ended June 30, 2020. As more fully described above, the principal
reason for this difference was the $147,711 increase in operating expenses.
Comparison of the Six Months Ended June 30, 2021, and June 30, 2020
The following table sets forth information from the statements of operations for
the six months ended June 30, 2021, and June 30, 2020.
Six Months Ended
June 30, 2021 June 30, 2020
Revenues $ 2,631,530 $ 849,169
Cost of goods sold (2,041,869 ) (418,046 )
Gross profit 589,661 431,123
Operating expenses 1,171,256 1,012,438
Loss from operations (581,595 ) (581,315 )
Non-operating income (expense):
Economic Injury Disaster Loan grant - 10,000
Interest (12,790 ) (19,007 )
Net loss $ (594,385 ) $ (590,322 )
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Revenues
Revenues were $2,631,530 and $849,169 for the six months ended June 30, 2021,
and June 30, 2020, respectively. The increase was primarily due to a $1,470,000
increase in revenues from sales of GrowPods (which the Company did not sell
prior to January 1, 2021), a $169,960 increase in revenues from sales of
lighters, a $70,835 increase in revenues from sales of other products, a $37,504
increase in revenues from sales of plastic lighter holders, and a $45,293
increase from sales of humidity pack inserts. The increase was partially offset
by a decrease of $31,596 decrease in Medtainer® sales.
Cost of Goods Sold
Cost of goods sold for the six months ended June 30, 2021, and June 30, 2020,
were $2,041,869 and $418,046, respectively. This increase was primarily due to a
$1,375,530 increase in the cost of GrowPods (which the Company did not purchase
prior to January 1, 2021), a $111,846 increase in the cost of lighters, an
increase of $44,078 increase in the cost of other products, and a $30,199
increase in humidity insert packs. This increase was partially offset by a
$8,129 decrease in cost of Medtainers®.
Operating Expenses
Operating expenses for the six months ended June 30, 2021, and June 30, 2020,
consisted of the following:
Six Months Ended
June 30, 2021 June 30, 2020
Advertising and marketing $ 32,431 $ 11,237
Bad debt - 32,470
Depreciation and amortization 139,824 48,521
Professional fees 128,121 95,410
Share-based compensation 270,000 298,076
Payroll 464,062 409,046
General and administrative 136,818 117,588
Total operating expenses $ 1,171,256 $ 1,012,438
Operating expenses were $1,171,256 and $1,012,438 for the six months ended June
30, 2021, and June 30, 2020, respectively. The increase in operating expenses
was attributed to a $55,016 increase in payroll expenses, a $91,303 increase in
depreciation and amortization expense and a $32,711 increase in professional
fees. This decrease was partially offset by a $32,470 decrease in bad debt
expense and a $28,076 decrease in share-based compensation.
Loss from Operations
Loss from operations increased from a loss of $581,315 for the six months ended
June 30, 2020, to a loss of $581,595 for the six months ended June 30, 2021. The
increase in loss from operations was primarily due to a $91,303 increase in
amortization and depreciation expense.
Other Income (Expense)
For the six months ended June 30, 2020, the Company received an Economic Injury
Disaster Loan grant of $10,000. For the six months ended June 30, 2021, and June
30, 2020, interest expense was $12,790 and $19,007, respectively.
Net Loss
Net loss for the six months ended June 30, 2020, was $589,907 ($298,076 of which
was non-cash expense for share-based compensation), versus net loss of $594,385
($270,000 of which was non-cash for share-based compensation) for the six months
ended June 30, 2020. As more fully described above, the principal reason for
this difference was the $158,818 increase in operating expenses.
Liquidity and Capital Resources
As of June 30, 2021, the Company had $337,581 in cash and accounts receivable of
$91,866. As of June 30, 2021, and December 31, 2020, the Company had negative
working capital of $929,389 and $1,208,780, respectively. As of June 30, 2021,
the Company had no commitments for capital expenditures. As of that date, the
Company had inventory of approximately 91,000 Medtainer® products, approximately
205,000 units of other products and one GrowPod unit.
During the six months ended June 30, 2021, the Company experienced negative cash
flow from operations of $446,263 and added $466,476 of cash flows from financing
activities. During the six months ended June 30, 2020, the Company experienced
negative cash flow from operations of $94,122 and added $258,921 of cash flows
from financing activities. Cash used in operating activities was primarily a
result of the Company's net loss, partially offset by the non-cash items
share-based compensation, depreciation, and amortization, the decrease in
operating assets and an increase in operating liabilities. The Company used
$16,000 and $0 in cash from investing activities for the six-month periods
ending June 30, 2021, and June 30, 2020, respectively. Cash provided from
financing activities increased from $258,921 for the six-month period ending
June 30, 2020, to $466,476 for the six-month period ending June 30, 2021.
17
The increase in cash provided from financing activities was primarily a result
of an increase in proceeds from the issuance of common stock.
On May 4, 2020, the Company made a note in favor of Customers Bank in the
principal amount of $137,690 pursuant to the terms of the Coronavirus Aid,
Relief, and Economic Security Act (the "CARES Act")(the "PPP Loan") and pursuant
to all regulations and guidance promulgated or provided by the SBA and other
Federal agencies that are now, or may become, applicable to the loan. On August
5, 2021, the Company was notified that the Paycheck Protection Note and the
interest accrued thereon had been forgiven in full, subject to review by the
SBA. The principal and interest forgiven will be recorded as non-operating
income in the consolidated statement of operations for the quarter ending
September 30, 2021.
In 2020, the Company received $137,690 from the PPP Loan and $210,000 from the
sale of 348,983 shares of Common Stock to two private investors, and in 2021,
the Company has received $615,000 from sales of 485,000 Common Stock to private
investors. The proceeds from these transactions, which total $962,690, are
insufficient to meet the Company's capital needs, inasmuch as it believes that
it will require approximately $1,000,000 in additional funding for the next 12
months, including approximately $600,000 to repay loans and interest that are
past due, assuming that the Company's operating loss remains at the same level.
The Company is seeking extensions of its past-due loans, and if it is successful
in doing so, the amount of such funding will be reduced, but assurance can be
given as to the extent that it will be successful. The Company plans to fund its
activities principally through the sale of debt or equity securities to private
investors and, if attained, its profits. There is no assurance that such funding
will be available on acceptable terms or available at all, or that the Company
will attain profitability. If the Company is unable to raise sufficient funds
when required or on acceptable terms, it may have to reduce significantly, or
discontinue, its operations. To the extent that funds are raised by issuing
equity securities or securities that are convertible into the Company's equity
securities, its stockholders may experience significant dilution.
The Company intends to devote its manpower and capital resources to increasing
revenues, while working to reduce the cost of goods sold and operating expenses.
Doing so depends on the successful execution of its operating plan, which
includes increasing sales of existing products, introducing additional products
and services, controlling cost of goods sold and operation expenses, negotiating
extensions of existing loans and raising either debt or equity financing.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
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ADVANCED CONTAINER TECHNOLOGIES, INC. 
